Dial Up a Put Trade on BlackBerry (BBRY) Earnings

BBRY's rally is likely irrational exuberance of the bull market

By Trader X | Mar 26, 2013, 6:15 am EDT

The earnings calendar is slime this week as earnings season doesn’t get swinging for another two weeks or so. That said, there is one stock that stands out on our list in terms of trading opportunities. Blackberry (NASDAQ:BBRY), or the artist formerly known as Research in Motion (RIMM), is set to release quarterly earnings on Thursday morning ahead of the open, giving us a nice short-term trade to consider.

As it stands now, the Street is expecting the struggling handset maker to announce quarterly loss of $0.32 per share compared to a profit of $0.80 a year ago. The expected results reflect the continued struggle of the once red-hot provider of the aptly-named “Crackberry”, which shouldn’t catch the market by surprise. While we think that there is a 50/50 shot that the company could provide better-than-expected results, it’s the chart of BBRY that has us looking at a bearish trade on the stock.

Recent price activity has been quick to jump higher as investors speculated on BBRY’s rebirth with the release of the new Z10 smartphone. As is often the case, the chart is suggesting that the market may have gotten a little ahead of itself when the stock rallied to the $18 price, and now the going looks to get tougher, which could see those bulls turn tail and sell, especially if the earnings aren’t stellar.

Click to Enlarge The long-term chart of BBRY identifies a struggle between the current prices and its 20-month moving average (blue line). This long-term trendline is often used as the line of demarcation between bull and bear market for a stock or index. In addition to the long-term chart, the stock’s short-term activity is breaking through key support at its 50-day trendline, a situation that is likely to add selling pressure to the stock.

Our trading experience tells us that the market is likely to see selling pressure hit BBRY shares on Thursday, even if the company matches expectations. The recent rally may be best qualified as irrational exuberance over a story that is in the early stages, at best. At worst, the company’s subscriptions drop more than expected, which would squelch any excitement over the new phone.

Recommendation: Our approach is to play the short side of the earnings announcement with the April $14 put (BBRY130420P00014000). This option is current priced at just under $1.30 and has some time value built into it in case the company does experience short-term upside on a better-than-expected earnings result. A trip back to the $12.00 level would result a minimum 50% profit based on intrinsic value alone.

Trader X frequents national investment conferences and has developed several market analysis tools that harness the powerful combination of behavioral analysis and technical analysis. He has decades of experience as a registered broker.

But we can’t reveal the source of this trade. Trader X’s privileged insight means he needs to be careful. He must act anonymously. While his identity can’t be known, Trader X will pull back the curtain to the trades he’s discovered.

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